In the midst of ongoing budget discussions, policymakers are considering a wide array of approaches for cutting spending and saving federal dollars. The Center for Medicare Advocacy recently wrote of ways to strengthen the Medicare program while achieving significant savings.[1] Included in our analysis was a proposal that would save taxpayers billions of dollars: reinstating drug rebates to the Medicare program from drug manufactures for beneficiaries dually eligible for both Medicare and Medicaid (Duals). Since Duals received their prescription drugs through Medicaid prior to the implementation of Medicare Part D, their drugs were subject to the Medicaid rebates through 2005. Reinstituting such rebates would save $141.2 billion over ten years according to the Congressional Budget Office (CBO).[2] This alert addresses some common misconceptions about the merits of reinstating such drug rebates.

Myth: Competition among private plans in the Medicare Prescription Drug Program (Part D) program slowed increases in drug prices

Truth: On the contrary, evidence shows that drug prices in general soared after Part D was established and the cost of medications for the 9 million dually-eligible beneficiaries in particular increased when the duals began receiving drugs through Medicare Part D plans. In 2005, before Part D was enacted, the average retail cost of brand-name drugs for individuals with chronic conditions, largely duals, was $1,049. That cost rose over 30% by 2009 to $1,382.[3] In the 12 months before March 2010, the cost of brand-name prescriptions most widely used by Medicare beneficiaries, including duals, rose by 9.7%, far above the 0.3% inflation rate for the same period. The increased cost has been shifted to Medicare and consequently to all U.S. taxpayers.

According to drug pricing expert Stephen Schondelmeyer at the University of Minnesota, "the drug prices have gone up since Part D began; they haven't gone down. We thought these plans would negotiate better prices, but they haven’t."[4] A study by the Committee on Oversight and Reform confirmed that Part D plans produced little savings and the cost of ending the rebate for duals was $2.8 billion in 2007 alone.[5] The study found on average, Part D insurers reported receiving rebates on just 27% of the most used drugs by beneficiaries, while the Medicaid program receives rebates for all covered drugs.[6]

The Bottom Line: Reinstating the drug rebates that existed prior to Part D will help curb costs that have been passed along from drug manufacturers and private plans to beneficiaries and taxpayers.

Myth: Reinstating drug rebates for duals will result in higher drug prices for other Medicare beneficiaries who purchase drugs.

Truth: When the rebate was eliminated, the price of prescription drugs for non-dually eligible Medicare beneficiaries rose. In fact, costs for common drugs rose much higher than the medical consumer price index's average annual increase from 2006 through the first quarter of 2010.[7]

The Bottom Line: Extending previously-existing rebates for duals would not directly result in price increases for other populations.

Myth: Reinstating drug rebates for duals will result in decreased investments in research and development from drug manufacturers.

Truth: During most of the two decades when brand-name drug manufacturers were required to provide rebates, investment in research and development increased steadily. When the rebates were eliminated, the rate of increase in investment slowed rather than accelerating. According to the Pharmaceutical Research and Manufacturers of America's own calculation of their members' research and development investment, that investment increased from 2000 to 2005 by $13.9 billion but from 2005 to 2009, the increase was only $5.9 billion.[8] Assumptions of a direct link between additional profits and increased investment in research and development are undermined by the documented rise in the amount of dollars that brand-name drug manufacturers spend on advertising and promotion. In a 2008 study, researchers at NYU argued "in favor of changing the priorities of the [pharmaceutical] industry" after finding that despite their claim, brand-name drug manufacturers in the U.S. spent almost twice as much on promotion as they spent on research and development.[9]

The Bottom Line: Ending the rebate did not spur investment in research and development, and reinstating it would not directly stifle innovation as claimed.

Conclusion

Reinstating the drug rebates that were paid to Medicare from drug manufacturers prior to the Medicare Modernization Act will save taxpayers billions of dollars and help curb costs for beneficiaries. As we have written, many other cost-saving proposals would harm the Medicare program and the many beneficiaries who are already struggling with high costs.[10] Policymakers should consider common-sense solutions, such as restoring drug rebates, that save money for all taxpayers and Medicare.